Tuesday, June 22, 2010

Yes Labour cuts. These cuts were inevitable when Labour spent all of this government's money during the last government. Tax rises are also Labour's fault - they have already spent all the money any new taxes will raise.

Yet to hear them, you'd think this was all unnecessary. We could keep spending. Deficits don't matter. Cuts are ideological. Well maybe they are for some, but it is hardly a criticism you can make when you have £44bn of cuts in your own fiscal plans.

To be clear, Labour do not have a leg to stand on when they criticise the first £44bn of cuts. Their objections are cynical duplicitous cant.

And if £44bn were the limit of their ambition for deficit reduction, they would be avoiding some cuts now for much greater cuts in the future as debt continues to balloon.

Some "opponents of cuts" will refer to Krugman, as if to say "look, borrowing is OK". If you are one of these, I ask you this: how much borrowing is OK? Why bother collecting taxes at all? Where does Krugman say that borrowing 10% of GDP year on year is a good idea? If we previously thought that a deficit of 2% of GDP were sustainable, then Krugman might convince us that 3% or 4% would be OK. Fine. All parties went into the election planning merely to halve the deficit, more or less, anyway.

The next defence is that huge reckless spending was necessary to maintain the economy at a time of crisis. Well yes and no. The need to spend money wisely was as great as ever, but I agree that the cuts shouldn't have started in earnest in 2008 or 2009. The problem is that Labour had already abandoned prudence and the golden rule, and was already borrowing over £80bn in 2008/9. Prudence in the good years would have left a lot more room for fiscal expansion during the banking crisis without leaving such a massive debt.

The last gasp defence is about the timing. Make us prudent, Lord, but not today. But the fact is that economic data is never clear or timely enough for the best timing of a fiscal change to be known with any certainty. All we can do is eschew dogma and respond as best we can to the economic data we have. But why do that when there is a rallying cry of "stop the cuts" to be sounded?

Is this sort of cynical opportunist politics inevitable? Won't governments always spend before an election because they might not have the chance afterwards? And won't this always condemn us to higher debt than we might rationally incur?

Well no, there is good news. The evidence suggests that sounder public finances do seem to be a consequence of (not just our) coalition government. Of course this makes sense. If there are two or more parties in a government, it is more likely that one of them will be in the next government, and will therefore be opposed to a scorched earth policy today. Three cheers for the new politics.